Retail Forecast 2015: Clearing Skies, Looming Clouds

By Phillip M. Perry

Blue skies and cool breezes. That’s the economic forecast as the calendar turns for a new year. Retailers looking to bolster revenues and profits over the next 12 months should benefit from a gradual improvement in the ability and willingness of shoppers to spend.

“Recent economic data have been encouraging,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa. (www.economy.com). “Stronger job growth, record low debt service burdens, record high stock values, and rebounding house prices are supporting consumer spending.”

While such factors would normally be expected to provide a healthy tailwind to the economy, a number of issues will continue to put a drag on progress. “Weak wage growth and a considerable amount of lingering slack in the labor market are preventing even stronger spending,” says Koropeckyj. She points to the high share of workers who would prefer to be employed full-time but who must settle for part time jobs.

GREATER SALES

The brighter 2015 outlook shows up in the number most commonly used to assess the state of the economy: Gross Domestic Product, or GDP. That figure represents the nation’s total revenues for all goods and services. The higher the number the more likely cash registers will ring a merry tune.

In 2015 the nation’s GDP is expected to increase at a 3.5 percent rate, according to Moody’s. That’s a considerable improvement over the economy’s average growth mode of 2.5 percent. “We are upbeat,” says Scott Hoyt, senior director of consumer economics for Moody’s. “It looks like the economy is starting to accelerate, and we expect that trend to be maintained.

Retailers could be forgiven for harboring some doubts. After all, a year ago economists were predicting a much brighter 2014 than what was actually experienced. Indeed, that year’s 2.2 percent GDP growth rate was considerably below the 3.1 percent increased forecast by Moody’s. What happened?

“The year started on a weak note caused by the severe winter weather and excessive inventory accumulation,” says Koropeckyj. Those issues pulled down the results for the remainder of the year.

Things weren’t helped by an unexpected summer spike in interest rates (sparked by some misinterpreted comments from the Federal Reserve about the end of quantitative easing) which put a damper on the recovery in the housing markets—not only in terms of direct sales but also in employment. “Fewer than anticipated construction jobs affected overall income growth in the economy,” says Hoyt.

SHOPPERS REBOUND

While consumers may harbor concerns about the economy, they are expected to open their wallets wider over the coming year. “Core retail sales should increase 6.0 percent in 2015,” says Hoyt. (Core retail sales exclude volatile revenues from auto sales and gas stations.) “That’s a significant increase from the 3.9 percent rate expected to be recorded when 2014 numbers are finally tallied.” It also reflects a more robust retail environment than the period just prior to the 2008 financial crisis when the comparable figure was only 4.6 percent.

Why the big spike? “Part of the reason is that 2014 has been stronger than the reported 3.9 percent retail growth rate suggests,” says Hoyt. “The weak first quarter in 2014 artificially depressed the year’s results.”

In other words, consumers are returning to the stores and retailers are entering 2015 on a pretty good trajectory. “With employment growth what it is, income growth should tick up,” says Hoyt. “Construction should also pick up: We are not building enough houses to meet the demand as evidenced by the rapid increase in housing prices. Builders will catch onto that, and it takes a fair bit of labor to build homes. That will further support the job market.” (For insights on what retailers can do now for a healthy 2015, see the sidebar, “Going Mobile.”)

For their part, shoppers are reporting that they feel more chipper than a year ago. “Consumer confidence has been sort of ‘inching up.’” Says Hoyt. “It has not risen a lot but we are by most measures near post recession highs. As conditions continue to improve and as the unemployment rate comes down and we see growth in wage rates, confidence should be higher. That will facilitate the release of pent up demand and greater spending.”

Indeed, the jobs picture has been improving steadily. The unemployment rate had improved to a 5.9 percent level toward the end of 2014, and Moody’s expects it to decline to 5.7 percent by the end of 2015. By the end of 2016 the nation should experience what economists call “full employment,” which is an unemployment rate of 5.5 percent.

HOUSING HEALTH

Housing is a big driver of jobs and of the economy—and retailers will be looking for a rebound in housing to help bolster 2015. Some improvement is indeed forecast: Housing starts are expected to ramp up to 1.5 million units in 2015, after coming in at the 1.1 million unit mark in 2014. While those numbers represent a gradual improvement over the results of recent years, they are still below what’s needed for a complete economic rebound. Koropeckyj points out that housing starts averaged 1.7 million units prior to the boom years of the middle of the last decade, and peaked at 2.1 million units in 2005.

“There are many constraints on homebuilders’ willingness and ability to ramp up quickly,” explains Koropeckyj. “These include the availability of construction and land development loans, labor shortages, and a lack of manufacturing capacity for certain building materials.” As a result of these capacity constraints, says Koropeckyj, the pace of housing starts could fall short of expectations for 2015.

As for sales of existing homes? “They have been slow to ramp up because credit availability remains very restrictive,” says Koropeckyj. The current 4.5 million annual sales rate is somewhat less than favorable—indeed, it is at a level last seen as far back as 2000.

LARGE EMPLOYERS

If the economy will continue its long steady climb back from the 2008 recession, large corporations will have to play a key role—not only in hiring but also in investment. And here the environment seems most favorable. “Business confidence surveys generally reflect that firms see better times ahead,” says Koropeckyj. Corporate profits are expected to increase by 12 percent in 2015 following an actual decline of 0.4 percent in 2014 caused by an extremely weak first quarter.

While corporations, like consumers, have been reluctant to spend on investment and hiring, they are poised for growth in both areas according to Koropeckyj. A number of factors suggest that they will invest more heavily in infrastructure and expansion over the coming 12 months. “Record profitability, rising utilization and falling vacancy rates, extraordinarily low borrowing costs, and increasing access to credit are lifting investment in equipment, software and buildings,” says Koropeckyj.

It all points to more spending which can enliven the nation’s economic picture. “Real investment spending growth is expected to pick up from 4.9 percent in 2013 and 5.8 percent in 2014 to 8.6 percent in 2015,” says Koropeckyj. As for hiring: “Job openings rates have surged in recent months, at times as high as those during the best times of the last business cycle.”

What’s true for large corporations seems to hold as well for their smaller siblings. “At smaller companies growth has been slow but steady,” says Walter Simson, principal of Chatham, N.J., -based Ventor Consulting (www.ventorllc.com). “Now businesses are showing tentative willingness to expand as opposed to three or five years ago when they were afraid banks might unexpectedly call in their loans. Retailers, for their part, are fairly busy. They are building additional stores, hiring more people and increasing hours. I see a continuation of that trend.”

Big employers are looking at more investment in 2015 partly because they seem to have reached the limits of what they can squeeze out of their current assets. “Businesses are approaching a point when they can no longer increase profits by just cutting costs,” says Koropeckyj. “They need to take chances, introduce new products, expand to new markets, enter new partnerships, or fund bold new ideas. Recessions typically make businesses reluctant to take such risks. However, with the recession more than five years in the rearview mirror, times don’t feel as scary.”

Reports from the field corroborate an improving outlook for business. "Sales continue to see a positive trend in the near future for manufacturers and backlogs have recovered with new orders either stable or increasing,” says Tom Palisin, Executive Director of The Manufacturers' Association, a York, Pa.,-based regional employers' organization with more than 350 member companies (mascpa.org). “With the continued positive growth of the U.S. gross domestic product (GDP), the domestic markets for manufacturers will continue to see growth opportunities.”

LOOMING CLOUDS

Unanticipated events may affect the economic forecast. Interest rates, for example, may rise after many years when the Federal Reserve kept them low to help spur the economy.

In the best of worlds, that might actually stimulate the economy. “There might be an advantage to the Fed’s letting interest rates rise or at least to signaling they might move that direction,” says Simson. “It might incite the animal spirits of consumers who jump to get new homes in the belief interest rates would go up.”

More home buying could only be to the good—and not only because it leads to more construction activity. “After people buy homes they buy furniture, pools and spas, floor coverings and patios,” says Simson. “That goes on for two or three years after the house is purchased.”

Of course, too high of a spike in interest rates would have a negative effect on housing. “The biggest threat to the outlook would be a repeat of what went wrong in 2014,” says Hoyt. “That would be if housing markets do not gather momentum and we do not get the anticipated construction and jobs.”

More risks abound. Consider another meltdown in the financial sector: “I am not convinced that the banking system is any better today than in 2008,” says Simson. “That could be a danger.” Yet the biggest risk, says Simson, might be that one of the world’s many severe problems—The Middle east, terrorist activity, the softening economy in Europe, or the spread of Ebola—might blow up and create the next economic disruption.

“It’s a dangerous world,” says Simson. “The risk is that something bad happens that makes people stay home and watch TV rather than go off and do business. You have to wake up every day and pray that does not happen.”

TEA LEAVES

In the early months of 2015, you can get a bead on where the economy is heading by watching for some key statistics in labor and housing. “Among the most important trends to watch will be how much labor market slack is absorbed and how quickly,” says Koropeckyj. “Will the labor market tighten? And will that affect wages in a way that encourages consumers to open their wallets at retail stores?” A second factor is the willingness of banks to lend. “Improved mortgage credit availability will be the key in enabling the housing market to take off.”

And keep an eye on the employment numbers. “People will be looking for continued job growth in early 2015,” says Simson. “If they see it they will think things are going well. If job growth is not there people will be worried that something is amiss.”